With NW European weather forecasts promising a warmer-than-normal remainder of February and start to March, there is little remaining upside to prices this winter. From now on, temperatures will generally be on the rise, so any deviation below normal will bring a relatively smaller increase in heating demand. With the y/y storage surplus already at 8.6 bcm and forecast to go above 14 bcm y/y by the start of March, the TTF has settled into pricing gas around the 5% coal-to-gas fuel switch trigger, both at the prompt and along the curve.
The fuel switch trigger saw modest support last week, as Cif ARA edged up on a very strong increase in oil prices. While Brent surged, adding 7.7% over the week, coal only managed to increase by 1.4%, but that oil support did stop coal dropping any further in a week when the Newcastle coal benchmark fell by 2.4% w/w. EU carbon dropped out of its trading range to the downside. While that did not trigger a huge EUA sell-off, we think carbon will now likely trade in a much lower range for the coming weeks, at least until Brexit uncertainty is resolved.
With a growing stock surplus set to pare summer injection demand, the market is already pricing in as much gas as possible into the power sector. Summer 2019-delivery gas prices have been closing around the 5% fuel switch trigger since early January, which puts nearly all gas-fired units into merit over coal plants, adding a maximum 12 bcm to power sector gas demand.
However, greater renewable generation this summer could provide a headwind to realising most of that 12 bcm in extra power sector gas demand. While renewable capacity growth slowed in 2018 below the average 20 GW/y additions we have seen most years since 2010, we still expect around 12 GW of incremental renewable capacity being available over summer 2019, which at average utilisation would pare gas demand by about 1.8 bcm. Southern European hydro levels look seasonably comfortable, and Alpine levels are at a four-year high, so gas-fired generation is unlikely to see any support outside of the coal-to-gas fuel switch. Nordic hydro levels have been persistently low, currently 11% lower y/y, although last year’s deterioration in the Nordic hydro balance started during the spring run-off, so there is time for the balance to improve.
The backwardation between the Mar-19 and Apr-19 contracts continues to be narrow, going from 63 cents/MWh at the start of last week to just 5 cents/MWh in early Monday trade (18 February). We have been arguing this spread should continue to narrow, and we might even see Mar-19 dip to a discount to Apr-19, a phenomenon rarely seen in EU gas markets but observed more regularly at Henry Hub. While Mar-19 does not have that long to go to expiry, we could still see it fall to a discount to Apr-19 this week.
|Supply-demand outlook and storage forecast for NW Europe, mcm|
|Source: Country SOs, GIE, Energy Aspects|